Small Caps & Others ~ Outlook 2016 - CIMB Research 2015-12-09: Companies that will thrive and fallen angels (Part 1)

Singapore Strategy 2016 - CIMB Research 2015-12-09: Sector Preferences and Country Top Picks class= Singapore Strategy 2016 Small Caps Country Top Picks

Small Caps & Others ~ Outlook 2016: Companies that will thrive and fallen angels 

  • In the small-cap/others space, we highlight five names with better near-term visibility and which benefit from secular long-term trends. 
  • We also highlight three dark horses that could make a comeback if the current issues depressing their share prices are resolved over the next three years.

Stocks we like now, on a balance of long-term views and current developments 


  • China Everbright Water is poised to ride China’s water boom as the government’s push for more public-private partnerships (PPPs) and upcoming 13th Five-Year Plan will provide further stimulus to the sector. 
  • Tighter water discharge standards will drive upgrading works as c.27% of its existing designed capacity has not met the highest Grade 1A standard, allowing the company to negotiate for higher water tariffs. Its estimated net gearing of 41% (by end-FY15) and SOE backing offer access to cheaper funding and leverage potential to drive higher ROEs. 
  • CEWL is currently trading at 12.2x CY17 EV/EBITDA, cheaper than Beijing Enterprises Water’s 14.0x and CITIC Envirotech’s 13.3x. Catalysts include faster-than-xpected expansion plans and tariff hike; key risks are stiffer competition leading to lower IRR and receivables risk. 


  • GL Limited would benefit from the favourable market dynamics of the UK hospitality sector. We expect the high-single-digit RevPAR growth of its London hotels to beat the market in FY16-17, driven by the group’s ongoing refurbishment and rebranding programme. 
  • The decentralised decision-making at each hotel level should also work to improve its cost efficiency and hence hotel profit. GL is currently trading at a hefty 48% discount to CY16 RNAV. 
  • Potential re-rating catalysts include organic hotel earnings growth, and possible monetisation of its non-core assets. 
  • Key risks include possible weak travel sentiment due to Islamic State of Iraq and Syria (ISIS) terrorism and a weak euro (which makes London a relatively more expensive tourist destination). 


  • Innovalues (through its customers, Sensata and Hilite) will benefit from the secular trend of more sensors being required in automobiles for various functions (driven by regulatory authorities’ safety and environmental concerns). 
  • The industrial sensors market, which is 37% of the entire sensor market (versus 21% for automotive sensors), is also an untapped opportunity for the company. 
  • In the short term, concerns over the possibility of a bankruptcy of Volkswagen (~ 10% of Innovalues sales) are an overhang on the share price. 


  • Tianjin Zhongxin is geared to the favourable macro trend of an ageing China population. Its flagship and exclusive product, Su Xiao Jiu Xin pill (25- 30% group profit), is a household name in China for treatment of cardiovascular ailment. 
  • The company’s S-share is trading at a sizeable 65% discount to its A-shares and its 15.6x CY16 P/E is also cheaper than peers’ average of c.20x. 
  • Catalysts include sales and margin expansion of Su Xiao. Potentially stiffer competition under China’s revised pharmaceutical procurement framework is a key risk. 


  • Venture Corporation is well positioned for the long term. The company has always been focused on growing the bottomline instead of chasing revenue growth. A net cash balance sheet has been the established trend and the company manages its working capital diligently. At the same time, Venture is careful in adding capacity and has stringent M&A criteria. 
  • Succession may not be that much of an issue as key management has been tasked with grooming their own successors. As such, the company has enough professional management bandwidth. 
  • In the longer term, there is a rising trend of tech companies, such as Amazon and Alphabet, creating new products. This could create business opportunities for niche EMS companies such as Venture. 
  • A more integrated ASEAN market may allow it to benefit from regional (ASEAN) manufacturing facilities. 

Kenneth NG CFA CIMB Securities | Singapore Research Team CIMB Securities | 2015-12-09
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